Buying or selling a house? – What you need to know about the new building report clause in the current sale and purchase agreement

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Conveyancing lawyer, Wade Hansen

The Auckland District Law Society "ADLS" produces the standard agreements that most, if not all real estate agents and lawyers use for the sale and purchase of residential property.

In 2012, the ADLS published a new (9th) edition with some significant changes such as the inclusion of a standard building report clause which the purchaser can choose to include by circling "Yes" at the appropriate place on the front page. This new clause affects both vendors and purchasers.

The clause states:

"9.3 If the purchaser has indicated on the front page of this agreement that a building report is required, this agreement is conditional upon the purchaser obtaining at the purchaser’s cost on or before the tenth working day after the date of this agreement a report on the condition of the buildings and any other improvements on the property that is satisfactory to the purchaser, on the basis of an objective assessment. The report must be prepared in good faith by a suitably-qualified building inspector in accordance with accepted principles and methods. Subject to the rights of any tenants of the property, the vendor shall allow the building inspector to inspect the property at all reasonable times upon reasonable notice for the purposes of preparation of the report. The building inspector may not carry out any invasive testing in the course of inspection without the vendor’s prior written consent. If the purchaser avoids this agreement for non-fulfilment of this condition pursuant to subclause 9.8(5), the purchaser must provide the vendor immediately upon request with a copy of the building inspector's report." 

Prior to this clause being inserted in the standard ADLS agreement, you may have seen agents and lawyers drafting building report clauses into the further terms of the agreement. As they were specifically drafted, they were usually tailored to each situation.

Ability for vendor to rectify defects
Prior to this edition coming out, it was common to insert a clause where the purchaser had to notify the vendor of the defects and then the vendor had the opportunity to fix them first, before the purchaser was allowed to cancel the agreement. The clause included in the 9th edition is different. There is no opportunity for the vendor to fix the defects. This new clause gives the purchaser the option of cancelling immediately if the purchaser finds the report unsatisfactory, even if the defects highlighted are minor.

Written report required
The clause may sound like it's heavily weighted in favour of the purchaser, but there are some requirements placed on the purchaser if they wish to cancel using this clause. For example, the clause provides that the purchaser must obtain a written report. The reasoning behind this is if the purchaser wants to cancel, the vendor can request a copy of the report and see exactly what the problems are. This benefits the vendor for future agreements, so such problems can be advertised from the outset, or remedied.

Suitably qualified builder
The clause states that a suitably qualified builder must complete the report so you can't just get your handyman mate to look through the property if they are not a qualified builder.

Ability to cancel – objective test
The clause also states that the purchaser must decide whether the report is unsatisfactory on an objective assessment - that is, would any reasonable purchaser, on reading that report, have found it unsatisfactory? The answer must be yes to cancel validly. 

Of course if, as purchaser, you do find it unsatisfactory, you can still try to negotiate with the vendor to perhaps obtain a reduced purchase price, or request that the defects raised in the report are fixed.  The vendor is not obliged, however, to enter into negotiations if they do not wish to.

Whether you are a vendor or a purchaser you will have to assess the clause from your perspective. If you are a vendor, are you happy for the purchaser to be able to cancel straight away OR do you want to be given the opportunity to rectify any defects first?

If you are a purchaser, are you happy to instruct and pay for a qualified builder to prepare a written report OR do you want your handyman mate to be able to have a look through for you.

If you want the latter in both cases, you will need to delete the standard building report clause at 9.3 and ask your lawyer to draft you a new clause the contemplates your specific needs for insertion into the further terms. It is best if you do this before you are making or accepting an offer. Remember in each case, the party on the other side (i.e. the vendor if you are a purchaser) will have to agree and accept any changes you make to the agreement.

Whether you are buying or selling, as with all contracts, it is best to get your lawyer to check and explain the agreement to you to ensure you understand what you are signing and that your interests are protected.

For a review of your sale and purchase agreement before you make an offer on a house, or assistance with your residential conveyancing, contact conveyancing solicitor, Wade Hansen by phone on 09 837 6885 or email wade.hansen@smith.partners.co.nz

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